Lessons of History

It seems truer than ever: The only thing we learn from history is that no one ever learns anything from history.

We sufferered a Great Depression in the 1930s; Japan is still stuck in its two-decade ‘great stagnation;’ and the lesson of both events is that you should NOT starve an economy of spending power when it is in a rut of zero interest rates and zero growth.  Yet all the major powers’ political leaders (thankfully, not all the major central bankers) are adopting and promoting fiscal policies that do just that.

Austerity is the order of the day, for Greece, Britain, the US, Germany, and others.  And the result is – no growth!   This austerity is justified in terms of major debt problems.   But it should be obvious that austerity only allows you to make progress on debt when you have economic growth.  That is arithmetic — if you have growth, and cut spending, more of that growth can be used to pay down debts.  But if you have NO GROWTH your debt gets bigger relative to GDP, and can get bigger fast if you have to refinance at higher rates that reflect the risk of low-growth high-debt conditions.  So if austerity measures have the effect of keeping an economy in no growth conditions for a longer period, they will make the debt problems worse.

Policy makers can show us austerity will pay off if they ASSUME that growth will magically return.  But there is no growth in sight.  Under those conditions, austerity is the wrong policy — but the one every major state has adopted.

Just amazing.

And the market dropped two hundred points again today because — surprise!–people (again) realized that Greece will not be able to repay its debts and that banks will have to take a loss on restructuring those debts.

Is it too much to hope for a reality-based policy on Greek debt?  No doubt — we have not had a reality-based policy on the Iraq war, the Afghan war, climate change, pollution regulation, energy, and much else.  So why expect anything different here?

About jackgoldstone

Hazel Professor of Public Policy at George Mason University
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